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*** "Let's Hope Americans Don't Copy the Japanese" says a
headline in the NY Post. "If we suddenly become cautious
savers, like the Japanese," writes John Crudele, "the tax
cut won't make us go on a shopping spree...the folks in
Washington would like Americans to remain spendthrifts."
*** Japan's banks disclosed that their loan balances fell
again - for the 37th month in a row. People in Japan just
don't want to borrow. And who can blame them? With stocks
down and the economy limping along - why take chances?
*** But are Americans really spendthrifts? Many economists
argued that the saving rate did not tell the whole story.
For while Americans did not put much money in banks - they
enjoyed capital gains from their stocks that replaced
traditional savings. Thus adjusted, savings rates were said
to be about as high in '99 as they were in '92 - about 8%
of income.
*** But then the stock gains disappeared, says the Dismal
Scientist at Economy.com, and "even when adjusted for
realized capital gains, the saving rate is declining and
declining at the fastest pace in recent memory."
*** "Another factor that is driving the saving rate down:"
continues the Dismal Scientist: "energy prices. Households
have been spending more and more of their income on
gasoline and home fuel since 1999 when energy prices began
escalating. In 2000 alone, consumer outlays on energy goods
and services and on gasoline fuel have soared by over 20%,
increasing by $89 billion to $504 billion. Additional
spending on fuel accounted for 18% of the increase in
consumer expenditures last year, while fuel outlays
comprise less than 5% of total expenditures."
"While the worst may be over for fuel price inflation,
income growth will slow and the stock market is unlikely to
go far. Indeed, Economy.com expects realized capital gains
to decline this year and next. Thus, unless consumers stay
on their more sober path of spending of the last quarter,
the saving rate could actually decline further, with very
negative implications for household balance sheets."
*** What's so bad about not having any savings? See
"Phantom Boom"...below...
*** Reuters reports the obvious - "Consumer Credit Quality
to Worsen on Layoffs." People who lose their jobs find it
harder to repay loans.
*** Even though Greenspan & Co. are trying to encourage
Americans to remain spendthrifts, the dynamics of a
deflation work in the other direction. People don't want to
borrow if they think they are going to lose their jobs; and
lenders are reluctant to make loans. Without anyone wanting
it, Americans may begin to 'copy the Japanese.'
*** The Dow rose 164 points yesterday. GE rose 4%. Walmart
also had a good day - up $3.
*** 3 stocks rose on the NYSE for every one that fell. Even
Cisco managed a bit of a comeback - up 5.8%. Cisco sold at
a P/E of 20 from '93 to '98. Now its forward P/E ratio is
44.
*** Earnings are collapsing - with many companies taking
big write-offs and posting big losses. This has the curious
effect of boosting P/E ratios.
*** Floyd Norris reports in the New York Times that the
Nasdaq 100 now sells for an astounding 811 times the
combined earnings of the group. The P/E for the Nasdaq 100
was only 127 at the end of December and has never before
exceeded 165.
*** The index itself has fallen more than 50% since last
March. But the problem isn't in the numerator, it's the
denominator - reflecting big losses among the tech and
Internets that make up the index. In fact, net earnings for
the entire index could even go negative. If so, it will be
the first time since 1933, the bottom of the oh-so-Great
Depression, when a major index (the Dow) posted a net loss.
*** "Companies are buying garbage," said Bruce R. Bent of
Reserve Funds. He was quoted in a NY TIMES article with the
headline: "Defaults Sound Alarm About Money Funds." Money
market funds hold $644 billion of commercial paper - such
as loans to California utilities. AMEX Cash Management, for
example, has 91% of its assets in commercial paper.
*** "To get a sense of the current economic slowdown,"
write the Grant's Investor duo Rose Ann Tortura and Mary
Levai, "one need only pick up a slimmed-down Sunday edition
of The New York Times -- heavyweight, as always, in
editorial content, but lighter in ad pages. ... of all
those suddenly haunted by the specter of declining ad
revenues, the New York Times Co. occupies the position of
greatest esteem, making its predicament of more than
passing interest." (see: Help Needed)
*** Oil fell 50 cents. Gold fell 70 cents. And the euro
climbed back over 93 cents.
*** Alan Greenspan will go before Congress today. All eyes
will be on the great man as he repeats his confidence in a
policy of destroying the dollar and encouraging Americans
to spend more than they can afford.
*** The big excitement yesterday was in the biotech area,
after Celera Genomics announced that there were only 30,000
genes to deal with in the human body...of which only 800
seemed to different from one person to the next. The
implication of this is that it will be easier to find the
critical genes.
*** Science, though, like stock prices, goes in cycles.
Each breakthrough discovery leads eventually to the
realization that we haven't a clue.
*** "The moon is the moon," said Mr. Deshais, our gardener,
yesterday. He is becoming agitated, nervously walking
around while talking to himself. He's worried that he won't
be able to finish his grafting before the moon changes her
favorable regard. "If it doesn't get done right away...it
will have to wait until next year," he told me.
*** So, I stopped my own work in order to drive him around
the countryside (his driver's license was taken away by the
local gendarmes in the interest of public safety). "Stop
here," he ordered, as we drove along deserted country
lanes. Mr. Deshais got out...let out his little dog,
Tina... and hopped over a fence to clip a few branches...
and then got back in the car with his twigs. This scene was
repeated several times - until we had enough kindling to
start an orchard...and we turned homeward. You can't argue
with the moon.
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* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
There is far more in question for the U.S. economy than
just the possibility of a conventional recession. At
stake is whether the whole U.S. new paradigm economy has
ever been for real or just a Wall Street hoax and
marketing story.
Dr. Kurt Richebacher
Today, the most powerful man who ever lived will take
center stage...or perhaps ring center...speaking not to a
dignified audience of paying theatre goers, but to a circus
of the US Congress.
I speak of the illustrious chairman of the world's most
successful banking cartel - the Federal Reserve, which is
not federal and has no reserves.
Of course, most people will take no notice. I will do my
work as always. Mr. Deshais will splice and dice the
various fruit tree cuttings that he gathered yesterday.
Indeed, billions of people will go about their business as
they always have.
And yet, Mr. Greenspan, it is believed, has the power to
make us all rich by adding trillions of dollars to our
collective net worth. Merely by manipulating a few simple
levers of interest rate and monetary policy, the Fed
chairman can induce people - at the margin - to borrow
money that they might not otherwise have borrowed....and to
spend money that they might otherwise have saved. And upon
these actions - again, at the margin - the entire world
economy hangs in the balance.
For if the U.S. falls into a deep, prolonged fit of
financial rectitude, in which its citizens forebear from
spending money they don't have, the whole world is doomed.
Who will buy the surplus autos of Japanese automakers? Who
will take on the burden of purchasing the designer jeans
stitched in Asian sweatshops?
Consumer spending is softening. Banks are tightening
lending requirements. The Nasdaq, which rose so splendidly
following his surprise rate cut on January 3rd, has now given
back all its gains. The capital gains, which disguised and
offset so much bad news - negative savings, marginal income
gains, reckless spending, weakening balance sheets - have
now disappeared. People still have faith in Greenspan and
in stocks. But they are beginning to worry. At the margin,
they are beginning to become more cautious.
The great man is on the spot. Two thirds of his 'committee
to save the world' have gone on to other pursuits. He must
now save the world single-handedly.
Today, Mr. Greenspan will repeat his commitment to fight
this upsurge in financial responsibility. He will propose
to combat it with the same weapons he used to create the
boom in the first place - making more money available.
But how is it possible, dear reader, that with no
additional effort on our part we can become richer merely
by decree of a banking cartel?
The burden of today's letters - as of so many recently - is
to prove that it is not possible. Looking for symmetry in
all things natural, we suspect that the U.S. boom of the
last 10 years is as bogus as the Japanese bust.
What does it take to create wealth? Time. Work.
Imagination. Skill. And real savings.
But the Fed has none of these things. It can no more
increase the amount of time available to us than it can
improve our skills.
All it can do is to offer us mock 'savings' upon which to
draw for capital investment. The trouble is that the
resulting boom is as fraudulent as the savings upon which
it is built.
You may recall the explanation of Dr. Frank Shostak of what
savings really are - a "pool of funding" that allows us to
invest in new, more productive industry. "Essentially,"
writes Shostak, "the pool of funding is the quantity of
goods available in an economy to support future
production."
These resources are real - not imaginary. Real production
requires real investment - of time, material, skills and so
forth.
"When a saver lends money, what he in fact lends to a
borrower," Shostak elaborates, "is the goods he hasn't
consumed. Credit then means that unconsumed goods are
loaned by one productive individual to another, to be
repaid out of future production."
"The existence of a central bank and fractional reserve
banking permits commercial banks to generate credit that
isn't backed up by real funding - i.e. credit out of 'thin
air.'"
"Trouble erupts," Shostak explains, "whenever the banking
system makes it appear that the pool of funding is larger
than it really is. When a central bank expands the money
stock, it doesn't enlarge the pool of funding. It gives
rise to consumption of goods, not preceded by production.
It leads to less means of sustenance."
"Loose monetary policies give the impression that they can
boost economic activity. That this is not the case becomes
apparent as soon as the [real] pool of funding begins to
stagnate or shrink. Once this happens, the economy begins
its downward plunge. The most aggressive loosening of money
won't reverse the plunge [fictitious money cannot
miraculously create real resources]."
Thanks to the biggest expansion of credit in history, the
U.S. economy enjoyed an unprecedented boom. But it was a
boom of a strange sort. Families were able to maintain
their standards of living - and enjoy the illusion of
financial progress only by going more deeply into debt and
working harder.
At its peak, Americans could look at their stock portfolios
and think themselves rich. But at the same time, debt
levels were at record highs. Americans - believing
themselves on top of the world, like the Japanese in 1989 -
bid up asset prices to absurd levels. But unlike the
Japanese, they also allowed themselves to become the
world's biggest debtors, owing more money to more people
than any nation there ever was.
Incomes barely increased during the whole boom period - and
still, in real, after-tax terms personal incomes are lower
than they were more than 20 years ago. Americans work more
hours for less pay than the citizens of Japan and several
European countries. And more couples than ever before
require both spouses to work in order to maintain their
standards of living.
Meanwhile, corporations practiced what Dr. Richebacher
calls "late, degenerate capitalism." Instead of investing
in new plant and equipment to produce future profits, U.S.
corporations slashed costs and engaged in various forms of
financial engineering to bring profits forward at the
expense of the balance sheet. Like consumers, they went
deeply into debt, often purchasing their own shares at
outrageous prices, in order to provide the illusion of
growing, current profits.
Phony credits introduced by the Fed encouraged consumption
and bad investment decisions, both of which ate into the
real 'pool of funding' available for future growth. This,
combined with the collapse of earnings, savings, and
capital gains means that the resources available for growth
and development actually shrank during the boom...and may
actually be smaller today than when the boom began.
Thanks to the Fed, Americans are poorer than they would be
otherwise, not richer. The boom was a sham.
Your correspondent, on semi-vacation in the beautiful
French countryside,
Bill Bonner
About
The Daily Reckoning:
Daily Reckoning
author Bill Bonner
Bill Bonner is,
in spite of himself, a natural born contrarian. Early each morning, Bill
writes The Daily
Reckoning—his take on the financial markets and what’s going
on in the world—and sends it off by e-mail before most Americans’
alarm clocks have buzzed. Many readers say it's the first thing they want
to read when they get up—not only because it's informative and thought
provoking, but also it's inspiring, in its own quirky and provocative way.
Of course, there's
much more to Bill than his daily market commentary. He's also the founder
and president of Agora Publishing, one of the world's most successful
consumer newsletter publishing companies. Bill's passion for international
travel and big ideas are reflected in the company he's successfully built.
In 1979, he began publishing International Living and Hulbert's
Financial Digest . Since then, the company has grown to include
dozens of newsletters focusing on health, travel, and finance. Bill has
vigorously expanded from Agora's home base in Baltimore, Maryland since
the early ’90s—opening offices in Florida, London, Paris, Ireland, and
Germany.
Agora's publication
subsidiaries include Pickering
& Chatto, a prestigious academic press in London and Les
Belles Lettres in Paris, best known as a publisher of classical
literature in bilingual editions.
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Last modified: April 01, 2001
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